hunting for buffett’s next elephant

credit-suisse.com/holtmethodology

HOLT

Market Commentary

Hunting for Buffett’s Next Elephant: Analyzing his Process for Acquisitions to Find Ideas

HOLT Sector Specialist Quarterly Thematic Update

March 2016

U.S. HOLT Sector Specialist Team

Consumer Specialist: Bhumika Gashti, CFA ([email protected])

Healthcare Specialist: Steve Bock, CFA ([email protected])

Technology Specialist: John Talbott, CFA, CPA ([email protected])

Energy & Materials Specialist: Vadim Vintsevsky ([email protected])

Financials Specialist: Ben Weyers ([email protected])

Industrials Specialist: Kevin Donovan ([email protected])

Adam Fuelleman, CFA ([email protected])

Rachael Harrison ([email protected])

Stephen Price ([email protected])

Ryan Ruggaard ([email protected])

mailto:[email protected]






























CLARITY IS CONFIDENCE

This is market commentary and not a research document.

HOLT

Why Look to Warren Buffett Now? The rise in global market volatility has made many investors question their portfolios and take a short-term view of the markets. Examining Warren

Buffett’s investment process and long-term success can provide a compass in these times.

The Buffett Investing Process: Buffett’s approach is to take equity stakes or conduct 100% outright acquisitions (e.g. PCP recently) of wonderful companies at fair prices. The purpose of

this report is to evaluate his process for outright acquisitions to find ideas for your portfolio.

Buffett’s Outright Acquisitions in HOLT: Analyzed within are Buffett’s material public acquisitions over the past 20 years. True to his word, Buffett has consistently purchased high

CFROI® companies with low expectations (i.e. inexpensive). Furthermore, the margin profile of

these firms has been remarkably stable over time. Finally, Buffett has arguably been modest all

of these years; he actually buys wonderful companies at wonderful prices.

Applying Buffett’s Approach to Find Ideas for Your Portfolio: Provided within are sector-specific “Potential Buffett Like Ideas for Your Portfolio” generated utilizing his strategy for

outright acquisitions coupled with his investing philosophy through the perspective of HOLT.

1

Hunting for Buffett’s Next Elephant: Analyzing his Process for Outright Acquisitions to Find Ideas for Your Portfolio

Note: Precision Castparts (PCP) acquisition was closed in February 2016.



HOLT 2

Current Market Environment: Recent global economic uncertainty has created significant volatility in U.S. equity markets, causing Investors to take a short term view of the markets.

S&P 500 Composite

10 Year US Treasury Yield

CBOE Volatility Index (VIX)

Oil

-14.2%

-57.3% -33.2%

+135%

Source: Bloomberg, LP; Date range is January 2, 2015 to March 4, 2016.



HOLT 3

Value of $1 Invested - Berkshire Hathaway vs. S&P 500

Annualized Return

(BRK): +20.8%

Berkshire’s best year in 1976

(+129%) driven by Insurance

and Banking investments

During the Great Recession

Berkshire was down 31%,

but outperformed the S&P

500 which fell 37%

During the “Internet

Bubble” Berkshire

underperformed

Early 1990’s Recession

Annualized Return

(S&P 500): +9.7%

Source: Berkshire Hathaway’s 2015 Annual Report and Investor Letter; NBER, Federal Reserve Bank of St. Louis.

Berkshire Hathaway vs S&P 500: Buffett’s investment approach has yielded incredible wealth for the shareholders of Berkshire Hathaway over the past 50 years. A closer review of Buffett’s strategy

could provide a compass for the current market environment.



HOLT 4

$132 Billion Equity Portfolio

Buffett’s Investment Process: Buffett’s approach is to take equity stakes or conduct 100% outright acquisitions (e.g. PCP recently) of wonderful companies at fair prices. The purpose of this report is to

evaluate his outright acquisitions to find ideas for your portfolio.

Wells Fargo & Co

($26.1B) Kraft Heinz Co

($23.7B)

Coca-Cola Co

($17.2B)

International Business

Machines

($11.2B)

American Express Co

($10.5B) Phillips 66

($5.0B)

Outright Acquisitions

Johns Manville

(Purchased 2001 for $2.2B)

Burlington Northern Santa Fe

(Purchased 2010 for $38.1B) Precision Castparts Corp


Lubrizol Corp


Shaw Industries

(Purchased 2000 for $2.1B) Clayton Homes


Source: Berkshire Hathaway’s 2015 Q4 Quarterly Report and 13-F filing, Bloomberg LP.



HOLT

Buffett’s Investment Philosophy: Warren Buffett’s investment philosophy (distilled below) can be considered through the HOLT framework.

5

High returns on equity and high returns on

net tangible assets,

Demonstrated consistent earnings power

and ability to cope with inflation,

Employ minimal or no debt in the firm’s

capital structure,

Wonderful business purchased at a fair

price,

Strong management in simple to

understand businesses.

Buffett’s Investing Approach HOLT Framework

Stable and/or improving CFROI® levels and

economic profit generation,

Stable and/or improving margin profile over

a long period of time,

Low HOLT economic leverage, which also

includes off balance sheet debt,

Consistently high CFROI business with fade

implied in its price,

Satisfactory HOLT accounting quality

scores, excluding certain industries.

Source: Buffett’s investing approach paraphrased from his annual reports over the years and page 32 of 2015 annual report.



HOLT

Buffett’s Outright Acquisitions in HOLT: When analyzing Buffett’s outright acquisitions in HOLT, evidence clearly suggests that Buffett consistently purchases high CFROI companies with stable

margins that are priced for long-term CFROI levels to fall dramatically (i.e. the firms are inexpensive).

6

CFROI (%) Sales, HOLT Operating Margins and Asset Turns

Asset Growth (%)

All data is as of the month-end prior to announced acquisition (T=0). Annual data; Metrics above represent average of select acquisitions over $250 million. Source: Credit Suisse HOLT Lens

Buffett tends to buy firms that earn consistently high CFROI levels (dark blue bars) at a low market implied CFROI (green dot below).

In addition to buying high CFROI companies at a low market implied

CFROI, Buffett also

purchases firms with

very stable margin profiles.



HOLT

Recent Acquisition - Precision Castparts (PCP): CFROI levels have been relatively stable since increasing off the lows in 2003, including throughout the 2008 financial crisis. Like most Buffett

acquisitions, PCP has above average CFROI with strong margins and modest expectations.

7

CFROI (%)

Source: Credit Suisse HOLT Lens

Sales, Margins and Asset Turns

Asset Growth (%)

Market Implied CFROI

after acquisition announcement



HOLT 8

HOLT’s M&A Database: Investors can use Credit Suisse HOLT Lens to evaluate a company’s acquisition skill by accessing the “Acquisitions & Divestitures” company report.

Access both Public and Private Acquisition Data




HOLT

Potential Buffett Ideas for Your Portfolio

9



HOLT

Consumer Discretionary & Staples (page 12)

– AAP, HAIN, HBI

Technology (page 17)

– CHKP, MMS

Healthcare (page 21)

– HSIC, MYL

Financials (page 25)

– AMTD, MCO

Industrials (page 29)

– SNA, WAB

Energy & Materials (page 33)

– IFF, POL

10

Note: Tickers contain links to company page in HOLT Lens.

Sector Buffett Screens and Firms Highlighted

https://holtlens.credit-suisse.com/dal/Ns8QoljuZVbUIuk

https://holtlens.credit-suisse.com/dal/NGEy3Po8A0Fa3n4

https://holtlens.credit-suisse.com/dal/NRDWj85prj4Yx2y

https://holtlens.credit-suisse.com/dal/NKp7ImF85rpyVXg

https://holtlens.credit-suisse.com/dal/NJxFireHjKqxpjo

https://holtlens.credit-suisse.com/dal/N2hwPTIi2SBLqlX

https://holtlens.credit-suisse.com/dal/NsS7CABuXNuS7uL

https://holtlens.credit-suisse.com/dal/NaIlF95ZCvEqc6e

https://holtlens.credit-suisse.com/dal/NrNTOJcoj11ufRk

https://holtlens.credit-suisse.com/dal/NBJe2B2ZsIeb7Hf

https://holtlens.credit-suisse.com/dal/N4ah9JzBjNc5oWn

https://holtlens.credit-suisse.com/dal/NporLLITeHQ4oZI

https://holtlens.credit-suisse.com/dal/N4fUYg0iKwdgqMv



HOLT

Current Sector CFROI Profile

CFROI Profile: “Potential Buffett Ideas” Potential Buffett Ideas for Your Portfolio

Ticker Company Market Cap

($B)

CFROI

(LFY)

HOLT Warranted

Upside

VFC VF CORP 27.7 20.7% 15%ROST ROSS STORES INC 22.8 14.6% 7%MNST MONSTER BEVERAGE CORP 21.9 31.1% 26%HBI HANESBRANDS INC 11.0 16.2% 34%AAP ADVANCE AUTO PARTS INC 11.0 13.7% 54%KORS MICHAEL KORS HOLDINGS LTD 10.2 28.1% 99%KMX CARMAX INC 9.9 12.8% 63%HAS HASBRO INC 9.5 14.8% 17%HOG HARLEY-DAVIDSON INC 8.0 14.7% 45%LKQ LKQ CORP 8.6 16.1% 38%GRMN GARMIN LTD 7.7 14.4% 27%LEA LEAR CORP 7.6 17.9% 112%BWA BORGWARNER INC 7.2 14.0% 72%PVH PVH CORP 6.5 16.1% 68%GIL GILDAN ACTIVEWEAR INC 6.3 16.7% 16%GNTX GENTEX CORP 4.2 15.8% 66%HAIN HAIN CELESTIAL GROUP INC 3.9 19.2% 29%BWLD BUFFALO WILD WINGS INC 3.0 12.0% 19%THO THOR INDUSTRIES INC 2.9 25.7% 136%HELE HELEN OF TROY LTD 2.7 31.8% 86%SAM BOSTON BEER INC -CL A 2.4 16.8% 25%TUP TUPPERWARE BRANDS CORP 2.5 12.7% 25%GNC GNC HOLDINGS INC 2.3 14.3% 20%GIII G-III APPAREL GROUP LTD 2.4 11.9% 45%DORM DORMAN PRODUCTS INC 1.8 16.3% 55%THRM GENTHERM INC 1.5 23.7% 128%USNA USANA HEALTH SCIENCES INC 1.5 25.5% 56%DW DREW INDUSTRIES INC 1.4 18.7% 66%TFM FRESH MARKET INC 1.1 11.6% 39%

HOLT Sector Specialist ideas highlighted on following pages

Sector Example: How to read the following sector summary pages

11

(1) Screen for potential Buffett

acquisition targets given the sector-specific criteria noted in the Appendix.

(2) Using the companies identified

in the screen on the right, model the “Potential Buffett Ideas” CFROI profile (top chart).

(3) Evaluate the CFROI profile of the Buffett Acquisition Targets relative to the Sector Median

CFROI Profile (lower chart).

(4) Lastly, HOLT Sector Specialists highlight selected companies, noted in green, on the following pages.

Portfolio CFROI profile using the “Potential

Buffett Ideas” from the table on the right

Please see Appendix for screen methodology. Source: Credit Suisse HOLT Lens



HOLT

Consumer Discretionary & Staples

Bhumika Gashti, CFA

U.S. Consumer Sector Specialist

+1 312 345 6166

[email protected]

Stephen Price

U.S. Consumer Team

+1 312 345 6188

[email protected]

12









HOLT


($B)

CFROI

(LFY)

HOLT Warranted

Upside

VFC VF CORP 27.7 20.7% 15%ROST ROSS STORES INC 22.8 14.6% 7%MNST MONSTER BEVERAGE CORP 21.9 31.1% 26%HBI HANESBRANDS INC 11.0 16.2% 34%AAP ADVANCE AUTO PARTS INC 11.0 13.7% 54%KORS MICHAEL KORS HOLDINGS LTD 10.2 28.1% 99%KMX CARMAX INC 9.9 12.8% 63%HAS HASBRO INC 9.5 14.8% 17%HOG HARLEY-DAVIDSON INC 8.0 14.7% 45%LKQ LKQ CORP 8.6 16.1% 38%GRMN GARMIN LTD 7.7 14.4% 27%LEA LEAR CORP 7.6 17.9% 112%BWA BORGWARNER INC 7.2 14.0% 72%PVH PVH CORP 6.5 16.1% 68%GIL GILDAN ACTIVEWEAR INC 6.3 16.7% 16%GNTX GENTEX CORP 4.2 15.8% 66%HAIN HAIN CELESTIAL GROUP INC 3.9 19.2% 29%BWLD BUFFALO WILD WINGS INC 3.0 12.0% 19%THO THOR INDUSTRIES INC 2.9 25.7% 136%HELE HELEN OF TROY LTD 2.7 31.8% 86%SAM BOSTON BEER INC -CL A 2.4 16.8% 25%TUP TUPPERWARE BRANDS CORP 2.5 12.7% 25%GNC GNC HOLDINGS INC 2.3 14.3% 20%GIII G-III APPAREL GROUP LTD 2.4 11.9% 45%DORM DORMAN PRODUCTS INC 1.8 16.3% 55%THRM GENTHERM INC 1.5 23.7% 128%USNA USANA HEALTH SCIENCES INC 1.5 25.5% 56%DW DREW INDUSTRIES INC 1.4 18.7% 66%TFM FRESH MARKET INC 1.1 11.6% 39%

Consumer Discretionary & Staples: The CFROI profile of “Potential Buffett Ideas” in Consumer is more than 600 bps higher than the overall sector while at the same time providing significantly lower

market expectations (i.e. less expensive).

13





Portfolio CFROI profile using the “Potential

Buffett Ideas” from the table on the right



HOLT

ADVANCE AUTO PARTS (AAP): Strong operator with low market expectations and potential catalysts to move the stock

14

Price Change % -2.22

-0.85

-11.48

-0.24

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Specialty Retail Market Cap $11.2B

152.37 USD

6m 3m 1m

HOLT Warranted Price 239.75 (+57%)

Scorecard Analysis

`

CFROI % (Economic Returns) Sales Growth %

Total Shareholder Return

Asset Growth % Margins %

Overall Percentile

CS Analyst Recommendation Outperform

Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Above Average

Governance Good

92

81

HOLT takeaways: Similar to peers AZO & ORLY, AAP has consistently earned double-digit CFROI levels over the last 10 years. Additionally,

over the last several years, the company benefited from higher overall margins (improved merchandising and pricing optimization)¹. AAP

recently acquired General Parts International in January 2014 which has led to improved overall returns on account of higher asset turns.

Despite this strong track record, AAP under-earns relative to AZO (19% CFROI) and ORLY (17% CFROI). ORLY acquired CSK back in

2008, the company has since improved CFROI by over 900bps. Is there similar scope for AAP? With defensive industry fundamentals,

potential for management change, and low market expectations, AAP might make a great longer term investment. Author: Bhumika Gashti

5.86

-0.18

Asset Turns (Sales/ Invested Capital)

86

46

¹ 2015 SEC 10K Filing

https://holtlens.credit-suisse.com/dal/Ns8QoljuZVbUIuk



HOLT

HAIN CELESTIAL GROUP (HAIN): High quality food producer operating in a growing category that is priced attractively relative to most Staples peers

15


-0.99

-33.71

-0.76

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Food Products Market Cap $4.0B

38.63 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile

CS Analyst Recommendation Not Rated

Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Good

Governance Average

73

85

HOLT takeaways: HAIN, a manufacturer of organic and natural products, improved CFROI over the past decade largely though

improvements in margins. With CFROI levels close to 20%, it now earns returns close to the top of most food product peers. However, peer

Annie’s had earned slightly higher returns at 25% before being bought by General Mills (GIS). Perhaps there is scope for continued

improvement? HAIN has proven to be a solid acquirer as goodwill paid appears to be at a minimum and the firm continues to deliver CFROI

improvements and strong growth post acquisitions. While CFROI forecasts suggest some decline in near term returns, the market is pricing

HAIN to deliver 11% CFROI in 10 years (well below the peer median) along with growth slowing to mid-single digits. Author: Bhumika Gashti

6.59

0.00


7

93

https://holtlens.credit-suisse.com/dal/NGEy3Po8A0Fa3n4



HOLT

HANESBRANDS (HBI): Strong track record of creating shareholder wealth with low market expectations

16


0.12

-0.64

-0.22

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Textiles, Apparel & Luxury Goods Market Cap $11.5B

29.38 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Below Average

Governance

87

43

72

89

HOLT takeaways: In the early 2000s, HBI under-earned relative to peers. Management focused on shareholder wealth creation principles

and shed underperforming assets and improved returns. Since the credit crisis, CFROI levels have increased almost every single year

(combination of margin expansion and asset turn improvement) and the company was able to achieve modest growth generating 7 years of

consistent increases in economic profits. With last year’s CFROI registering at over 15%, HBI now earns returns akin to US peers.

Consensus estimates suggest CFROI will continue to improve, yet the market is pricing returns to decline with falling growth. CS analyst

forecast indicate that margins may continue to improve over the next 5 years. Author: Bhumika Gashti

17.71

-0.22


N/A

https://holtlens.credit-suisse.com/dal/NRDWj85prj4Yx2y



HOLT

Information Technology

John Talbott, CFA, CPA

U.S. Technology Sector Specialist

+1 212 345 1813

[email protected]

Ryan Ruggaard

U.S. Technology Team

+1 312 345 6129

[email protected]

17









HOLT


($B)

CFROI

(LFY)

HOLT Warranted

Upside

CTSH COGNIZANT TECH SOLUTIONS 34.7 19.3% 67%CHKP CHECK POINT SOFTWARE 15.2 20.2% 30%ADS ALLIANCE DATA SYSTEMS CORP 13.6 36.3% 109%DOX AMDOCS 8.7 15.3% 4%SNPS SYNOPSYS INC 6.8 16.6% 75%OTEX OPEN TEXT CORP 6.0 26.0% 29%AVT AVNET INC 5.4 11.3% 60%ARW ARROW ELECTRONICS INC 5.3 15.0% 77%IPGP IPG PHOTONICS CORP 4.4 16.7% 43%SNX SYNNEX CORP 3.7 12.0% 31%NICE NICE SYSTEMS LTD 3.6 19.1% 32%EEFT EURONET WORLDWIDE INC 3.5 17.7% 23%EPAM EPAM SYSTEMS INC 3.4 20.9% 36%MMS MAXIMUS INC 3.2 23.5% 70%LFUS LITTELFUSE INC 2.6 12.1% 2%BDC BELDEN INC 2.3 14.2% 59%ACIW ACI WORLDWIDE INC 2.2 14.5% 14%NSR NEUSTAR INC 1.3 35.0% 251%

Information Technology: Buffett has not traditionally acquired Technology firms; however, the profile of Potential Ideas exemplify his process – above average CFROI profiles, consistent returns and low

market implied expectations.

18



Portfolio CFROI profile using the “Buffett

Potential Ideas” from the table on the right.





HOLT

CHECK POINT SOFTWARE TECHNOLOGIES (CHKP): Steady wealth compounder with an attractive valuation relative to software peers

19


0.23

8.68

-0.05

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Systems Software Market Cap $15.5B

84.35 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Good

Governance N/A

33

45

HOLT takeaways: CHKP has historically achieved high and stable CFROI levels around 20% due to the firm’s strong margin profile, which is

best in class among software peers. However, margins have modestly declined in recent years as CHKP has ramped up investment in R&D

and go-to market initiatives in response to increased competition. The market is implying this margin compression to continue to the mid 40’s

by 2024, which may ultimately prove too bearish. 25% upside is warranted if CHKP’s investments are effective at selling new products into its

existing large installed base, allowing CHKP’s margins to remain stable long-term at 50%.

Author: John Talbott

8.11

0.00


17

33

https://holtlens.credit-suisse.com/dal/NKp7ImF85rpyVXg



HOLT

MAXIMUS INC (MMS): Best in class IT Services operator that has executed on margin improvement

20


-3.05

-15.18

-0.03

Momentum

CFROI Revisions

Price (Mar 4, 2016)

IT Services Market Cap $3.3B

50.41 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Above Average

Governance N/A

85

47

72

HOLT takeaways: MMS has historically achieved CFROI levels near 20% due to MMS’s high asset efficiency relative to IT Service peers.

CFROI levels have been on the rise in recent years due to MMS’s ability to expand margins over time and to close the gap to IT Service peers.

However, the market has been skeptical on the sustainability of MMS CFROI levels since 2014 as start-up costs of new contracts have

weighed on margins. If MMS is able to execute on its margin improvement strategy and keep margins at 15% long-term coupled with long-

term sales growth of 7%, 30% upside appears warranted.

Author: John Talbott

9.57

-0.14


80

https://holtlens.credit-suisse.com/dal/NJxFireHjKqxpjo



HOLT

Healthcare

Steve Bock, CFA

U.S. Healthcare Sector Specialist

+1 312 345 6121

[email protected]

Adam Fuelleman, CFA

U.S. Healthcare Team

+1 312 345 6140

[email protected]

21









HOLT


($B)

CFROI

(LFY)

HOLT Warranted

Upside

CAH CARDINAL HEALTH INC 27.4 18.3% 17%MYL MYLAN NV 23.1 11.8% 47%ILMN ILLUMINA INC 22.7 21.2% 3%ZBH ZIMMER BIOMET HOLDINGS INC 19.9 14.9% 6%STJ ST JUDE MEDICAL INC 15.4 16.3% 5%HSIC SCHEIN (HENRY) INC 13.8 25.1% 1%UHS UNIVERSAL HEALTH SVCS INC 11.2 12.4% 14%VAR VARIAN MEDICAL SYSTEMS INC 7.6 14.9% 18%COO COOPER COMPANIES INC 7.0 17.6% 3%TARO TARO PHARMACEUTICAL INDUSTRIES LTD6.1 24.2% 153%PDCO PATTERSON COMPANIES INC 4.4 16.6% 4%WOOF VCA INC 4.1 17.5% 5%GMED GLOBUS MEDICAL INC 2.4 14.4% 21%LIVN LIVANOVA PLC 1.5 17.4% 39%

Healthcare: By focusing on typical Buffett acquisitions, the Potential Ideas CFROI profile improves considerably (+10%). The large cash generating abilities in many of the screened firms coupled with

low market expectations may make Healthcare a potential future target.

22









HOLT

HENRY SCHEIN (HSIC): Expectations remain reasonable despite continued growth and increasing margins

23

Price Change % 6.08

0.09

26.04

0.05

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Health Care Distributors Market Cap $13.8B

167.97 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Above Average

Governance Average

81

42

HOLT takeaways: HSIC's CFROI performance continues to rebound following a short negative trend in 2012 and 2013. Slowing growth in

the dental market contributed to reduced sales growth, resulting in lower asset turns as it continued to invest, depressing returns. However,

organic growth and an increase in margins have driven performance to industry best-in-class. The Distributors industry has experienced

significant consolidation over the past decade, and HSIC has continued to increase market share through acquisitions. The premiums paid in

acquisitions (goodwill) have kept Transaction CFROI low, while still helping to fuel Economic Profit creation.

Author: Steve Bock

13.59

0.08


82

76

https://holtlens.credit-suisse.com/dal/N2hwPTIi2SBLqlX



HOLT

MYLAN (MYL): Expectations have declined after proposed acquisition of Meda AB

24


0.34

-6.81

0.00

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Pharmaceuticals Market Cap $22.0B

44.78 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Average

Governance Good

83

59

54

HOLT takeaways: MYL historically has generated CFROI levels close to 10% with spikes due to market exclusivity and troughs related to

M&A. MYL benefited from the branded drug patent cliff which subsequently slowed in 2013. More recently, margins have continued to expand

as a result of acquisitions and new generic offerings. Asset efficiency has declined over the same period, keeping CFROI levels largely flat

since 2013. MYL's valuation declined over the past year as the takeover premium originally established by Teva Pharmaceuticals has

disappeared and the overhang of its attempted hostile bid for Perrigo is now gone; however, over the past 2 months, MYL’s has

underperformed as investors digest the large proposed acquisition premium MYL offered for Meda AB. Author: Steve Bock

-12.86

-0.15


88

https://holtlens.credit-suisse.com/dal/NsS7CABuXNuS7uL



HOLT

Financials

Ben Weyers

U.S. Financials Sector Specialist

+1 312 345 6197

[email protected]

Stephen Price

U.S. Financials Team

+1 312 345 6188

[email protected]

25









HOLT


($B)

CFROI

(LFY)

HOLT Warranted

Upside

AON AON PLC 25.8 31.8% 8%MHFI MCGRAW HILL FINANCIAL 23.8 64.2% 36%BEN FRANKLIN RESOURCES INC 21.5 17.9% 17%MCO MOODY'S CORP 17.5 36.4% 5%TROW PRICE (T. ROWE) GROUP 17.5 29.4% 48%AMTD TD AMERITRADE HOLDINGS 15.7 21.9% 34%IVZ INVESCO LTD 11.3 33.0% 63%FNF FNF GROUP 9.1 15.2% 32%CBG CBRE GROUP INC 8.8 24.2% 58%JLL JONES LANG LASALLE INC 4.8 23.8% 129%LAZ LAZARD LTD 4.3 24.3% 48%JNS JANUS CAPITAL GROUP INC 2.4 18.8% 16%WDR WADDELL&REED FINL INC 1.9 31.4% 49%LPLA LPL FINANCIAL HOLDINGS INC 1.9 22.5% 0%EVR EVERCORE PARTNERS INC 1.7 22.1% 101%

Financials: As one of Buffett’s favorite sectors, the Potential Buffett Ideas generate higher levels of CFROI than the overall sector. Market implied expectations are also well below current forecasts.

26









HOLT

TD AMERITRADE HOLDINGS (AMTD): Strong operator at a discount to history

27


-1.73

-4.14

0.18

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Capital Markets Market Cap $16.7B

31.05 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile

CS Analyst Recommendation Neutral

Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Good

Governance Average

85

71

60

56

HOLT takeaways: AMTD provides securities brokerage and related technology-based financial services to investors. AMTD has traditionally

been a strong operator with CFROI levels well above its closest peer SCHW ( ~22% vs. ~9%). AMTD’s return advantage has been driven by

both superior EBITDA margins and better asset efficiency. AMTD has sold off with the broader financials sector year to date and now has its

highest level of upside on the HOLT model since Dec ‘09.

Author: Ben Weyers

14.32

0.00


https://holtlens.credit-suisse.com/dal/NaIlF95ZCvEqc6e



HOLT

MOODY’S CORP (MCO): Stable margin profile and at a historic discount to MHFI

28


-2.20

-3.83

-1.60

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Diversified Financial Services Market Cap $18.7B

95.40 USD

6m 3m 1m

HOLT Warranted Price 90.13 (-6%)

Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Good

Governance Average

HOLT takeaways: Moody’s provides ratings, research and analytics to capital markets participants. Moody’s has generated solid CFROI

levels (~30 – 35%) on mostly positive but volatile asset growth. These return levels have been buoyed by stable to improving EBITDA margins

(MCO - 45.5% vs. MHFI – 41.5%). Asset efficiency at MCO, however, has been flat to lower (sales have slowed and cash balances have

increased). Using HOLT’s Economic PE, the market is currently valuing MCO at near all-time low levels relative to MHFI despite its

strong/stable margins and growing cash balance.

Author: Ben Weyers

13.98

-0.96


85

58

40

40

https://holtlens.credit-suisse.com/dal/NrNTOJcoj11ufRk



HOLT

Industrials

Kevin Donovan

U.S. Industrials Sector Specialist

+1 617 556 5611

[email protected]

29






HOLT


($B)

CFROI

(LFY)

HOLT Warranted

Upside

ETN EATON CORP PLC 26.5 18.8% 2%CMI CUMMINS INC 17.0 11.8% 37%AME AMETEK INC 11.1 25.9% 25%AYI ACUITY BRANDS INC 9.1 18.4% 20%PNR PENTAIR PLC 8.7 19.5% 30%EXPD EXPEDITORS INTL WASH INC 8.6 15.7% 5%SNA SNAP-ON INC 8.6 17.5% 56%IHS IHS INC 7.1 38.4% 73%WAB WABTEC CORP 6.6 21.9% 72%CSL CARLISLE COS INC 5.8 18.9% 34%HUBB HUBBELL INC 5.7 15.1% 2%RHI ROBERT HALF INTL INC 5.2 20.3% 22%JEC JACOBS ENGINEERING GROUP 4.8 13.7% 26%TTC TORO CO 4.4 15.7% 4%HEI HEICO CORP 3.8 23.5% 21%TDY TELEDYNE TECHNOLOGIES INC 3.0 16.3% 39%EME EMCOR GROUP INC 2.8 14.6% 2%DLX DELUXE CORP 2.8 23.6% 36%LSTR LANDSTAR SYSTEM INC 2.6 19.0% 7%ENS ENERSYS INC 2.3 13.3% 41%WCC WESCO INTL INC 1.9 20.9% 46%ASGN ON ASSIGNMENT INC 1.7 30.1% 321%AIT APPLIED INDUSTRIAL TECH INC 1.5 12.4% 25%CSTE CAESARSTONE SDOT-YAM LTD 1.3 19.6% 55%

Industrials: As one of Buffett’s most common acquisition targets, Industrials provide numerous opportunities for high quality firms with above average, stable CFROI’s coupled with low market

expectations. The Potential Buffett Ideas generate more than 600 bps higher CFROI than the sector.

30









HOLT

SNAP-ON (SNA): Expectations remain low despite improving operations

31


-0.23

-0.23

-0.23

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Industrial Machinery Market Cap $8.9B

154.04 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Above Average

Governance Good

91

60

78

HOLT takeaways: SNA has improved CFROI levels each of the last 6 years while continually growing assets. Much of the improvement in

SNA’s CFROI levels have come from the firm’s ability to generate consistently higher margins, largely due to operating leverage and

continuous improvement initiatives designed to streamline operations. Further, during this time SNA has outperformed the market by over

200%. The current market price implies that CFROI will fall to financial crisis-levels over the next ten years.

Author: Kevin Donovan

10.11

-0.16


83

https://holtlens.credit-suisse.com/dal/NBJe2B2ZsIeb7Hf



HOLT

WABTEC CORP (WAB): Wealth Compounder priced to fade

32


-1.48

-17.92

-0.65

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Construction Machinery Market Cap $6.9B

75.02 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Good

Governance Good

80

83

HOLT takeaways: Through margin expansion and better asset efficiency, WAB has improved CFROI from 6% in 2003 to 23% in 2015 (near

peer highs). Since operations began improving, WAB has achieved positive asset growth, organic and acquisitive, which has compounded

wealth for shareholders. Current market expectations imply CFROI will fall from its 15-year peak to levels not achieved since 2005. In other

words, expectations are low for this wealth compounder stock.

Author: Kevin Donovan

20.86

-0.28


16

90

https://holtlens.credit-suisse.com/dal/N4ah9JzBjNc5oWn



HOLT

Materials & Energy

Vadim Vintsevsky

U.S. Resources Sector Specialist

+1 617 556 5580

[email protected]

33






HOLT


($B)

CFROI

(LFY)

HOLT Warranted

Upside

PPG PPG INDUSTRIES INC 26.4 10.3% 1%POT POTASH CORP SASK INC 14.3 8.7% 37%MOS MOSAIC CO 9.5 6.7% 30%IFF INTL FLAVORS & FRAGRANCES 8.4 11.6% 10%HFC HOLLYFRONTIER CORP 6.1 11.5% 86%WLK WESTLAKE CHEMICAL CORP 5.8 12.4% 81%FTI FMC TECHNOLOGIES INC 5.6 15.0% 6%RS RELIANCE STEEL & ALUMINUM 4.4 9.6% 26%INT WORLD FUEL SERVICES CORP 3.3 14.2% 28%POL POLYONE CORP 2.3 10.5% 2%FUL FULLER (H. B.) CO 1.9 7.1% 6%DRQ DRIL-QUIP INC 2.0 13.7% 47%NP NEENAH PAPER INC 1.0 10.1% 18%

Materials & Energy: The Potential Buffett Ideas do not alleviate the cyclicality in the sector, but have generated CFROI levels 400bps greater than the overall sector with lower market expectations. Even

in these cyclical sectors, there are still a handful of ideas that pass Buffett’s general criteria.

34









HOLT

INTERNATIONAL FLAVORS & FRAGREANCES (IFF): Resilient CFROI priced to start fading

35


-0.57

-0.5

-0.55

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Specialty Chem icals Market Cap $8.6B

106.41 USD

6m 3m 1m


Scorecard Analysis




Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality

Risk

Above Average

Governance Poor

80

55

69

HOLT takeaways: IFF has achieved among the most stable CFROI profiles within the Chemicals space over its history. Additionally, despite

declining asset efficiency, IFF has been able to improve EBITDA margins in recent years to achieve decade high CFROI last fiscal year. At the

current price, the market is pricing in returns to fall back to 10%, implying upside in the shares if IFF can sustain its historical levels.

Author: Vadim Vintsevsky

-10.86

-0.53


82

https://holtlens.credit-suisse.com/dal/NporLLITeHQ4oZI



HOLT

POLYONE CORP (POL): Restructuring successful

36


-0.67

-8.17

-0.30

Momentum

CFROI Revisions

Price (Mar 4, 2016)

Specialty Chem icals Market Cap $2.4B

28.56 USD

6m 3m 1m


Scorecard Analysis



Overall Percentile


Operational Quality

Momentum

Valuation

Accounting Quality Below Average

Risk

Governance Not Rated

74

51

79

HOLT takeaways: After many years of struggling to earn their cost of capital, recent restructuring efforts have resulted in CFROI tripling (over

the course of five years) to double-digit levels. While the return improvement has come from a significant uptick in margins, the firm’s stable

asset turns was achieved through shedding assets in a negative sales growth environment. POL has an opportunity to improve CFROI further

through asset turns if sales growth comes back; which the market is currently not pricing in.

Author: Vadim Vintsevsky

15.49

-0.30


66


https://holtlens.credit-suisse.com/dal/N4fUYg0iKwdgqMv



HOLT

Appendix

37



HOLT 38

Screening Criteria: While many aspects of Buffett’s acquisition criteria remain the same, there are differences across sectors and industries. The following is a table detailing the criteria used in

implementing the screen for acquisition targets in the sector-specific potential idea screens.

Excluded Industries: Biotechnology, Communications Equipment, Internet Retailers, Internet Software & Services, Technology Hardware, Storage & Peripherals and Semiconductors.

¹ CFROI Spread = CFROI (LFY) minus 5-year Median CFROI

² Margin Spread = HOLT Operating Margin (LFY) minus 10-year Median HOLT Operating Margin

Excluded Sectors: Telecommunications and Utilities.

Sector Market Cap

($B)

CFROI

(Past 5

Years)

CFROI

Spread¹

Margin

Spread²

Pretax

Income

HOLT Economic

Leverage

HOLT

Accounting

Quality

HOLT Warranted

Upside

Consumer Discretionary & Staples $1 - $35 > 10% > -1 > -1 > $75mln < 40% Not "Poor" > 0%

Information Technology $1 - $35 > 10% > 0 > -2 > $75mln < 40% Not "Poor" > 0%

Healthcare $1 - $35 > 9% > -3 > -3 > $75mln < 40% Not "Poor" > 0%

Financials $1 - $35 > 10% > -3 > -3 > $75mln < 40% Not "Poor" > 0%

Industrials $1 - $35 > 10% > 0 > 0 > $75mln < 40% Not "Poor" > 0%

Energy & Materials $1 - $35 > 6% n/a n/a > $75mln < 40% Not "Poor" > 0%

Note: In BRK’s acquisition criteria listed in its annual report, it states large purchases of at least $75mln of pretax earnings.



HOLT 39

Outright Acquisitions of BRK: Warren Buffett’s investing principles are exemplified by the characteristics of Berkshire Hathaway’s outright acquisitions over the years. Below is a select list of

acquisitions which were used in creating the “Acquisition Portfolio”.

Company Total Transaction

Value ($B)

Announcement

Date

CFROI

(LFY -2)

CFROI

(LFY -1)

CFROI

(LFY)

HOLT Operating

Margin Sector

Burlington Northern Santa Fe LLC 38.1 11/3/2009 6.0% 5.8% 6.2% 35.8% Industrials

Precision Castparts Corp 35.6 8/10/2015 21.0% 23.6% 22.2% 31.6% Industrials

Kraft Heinz Foods Co 27.2 2/14/2013 21.3% 18.1% 17.6% 19.0% Consumer Staples

Lubrizol Corp 9.2 3/14/2011 8.8% 8.2% 13.5% 28.1% Materials

Johns Manville Corp 2.2 12/20/2000 8.2% 9.2% 14.2% 25.3% Industrials

Shaw Industries Inc 2.1 9/6/2000 6.2% 8.5% 14.0% 14.3% Consumer Discretionary

Clayton Homes Inc 1.8 4/1/2003 8.9% 5.8% 6.8% 18.8% Industrials

FlightSafety International Inc 1.5 10/15/1996 7.0% 7.4% 7.5% 51.6% Industrials

Russell Corp 1.0 4/17/2006 5.1% 5.7% 5.9% 12.2% Consumer Discretionary

Benjamin Moore & Co 1.0 11/8/2000 10.9% 12.3% 13.6% 21.5% Materials

Justin Industries Inc 0.6 6/20/2000 5.3% 5.5% 5.9% 15.8% Consumer Discretionary

Xtra Corp 0.6 7/31/2001 6.0% 5.9% 5.9% 69.2% Industrials

Dairy Queen 0.6 10/21/1997 17.8% 17.0% 17.1% 16.4% Consumer Staples

Source: Only CFROI businesses ex-utilities greater than $250 million were considered. Data sourced from Factset, Bloomberg and HOLT Lens.



HOLT

CFROI Profiles of Select Buffett Acquisitions: All profiles are as of the month end prior to the announcement of the acquisition and demonstrate the key Buffett acquisition tenants (i.e. high CFROI

levels coupled with low expectations).

40

INT’L DAIRY QUEEN (Announced 10/21/1997)

LUBRIZOL CORP (Announced 3/14/2011)

BENJAMIN MOORE & CO (Announced 11/8/2000)

JOHNS MANVILLE (Announced 12/20/2000)




HOLT 41

Equity Portfolio Holdings of BRK: Warren Buffett’s investing principles are further exemplified by the characteristics of Berkshire Hathaway’s equity portfolio constituents.

Ticker CompanyMarket Cap

($B)

Buffett

Holding Size¹

($B)

CFROI

(LFY)

52-Week

Total Return

HOLT

Leverage

(%)

Accounting

QualitySector

WFC WELLS FARGO & CO 277.7 26.1 12.3 (9.6%) Average Financials

KHC KRAFT HEINZ CO 88.3 23.7 24.3 Average Consumer Staples

KO COCA-COLA CO 186.8 17.2 14.5 7.4% 21.4 Above Average Consumer Staples

IBM INTL BUSINESS MACHINES CORP 133.5 11.2 25.8 (15.5%) 21.5 Below Average Information Technology

AXP AMERICAN EXPRESS CO 68.5 10.5 24.6 (30.1%) Poor Financials

PSX PHILLIPS 66 43.6 5.0 4.7 6.5% 28.7 Below Average Energy

PG PROCTER & GAMBLE CO 216.0 4.2 20.6 (0.5%) 19.6 Average Consumer Staples

USB U S BANCORP 74.8 3.6 14.1 (9.3%) Above Average Financials

WMT WAL-MART STORES INC 196.3 3.4 10.9 (22.1%) 20.0 Good Consumer Staples

DVA DAVITA HEALTHCARE PARTNERS 14.7 2.7 16.5 (13.5%) 38.8 Average Health Care

MCO MOODY'S CORP 19.8 2.5 36.4 (10.4%) 16.2 Average Financials

GS GOLDMAN SACHS GROUP INC 80.3 2.0 10.5 (22.0%) Average Financials

CHTR CHARTER COMMUNICATIONS INC 20.5 1.9 6.0 (1.3%) 53.4 Poor Consumer Discretionary

DE DEERE & CO 24.2 1.7 9.6 (14.1%) 38.8 Below Average Industrials

GM GENERAL MOTORS CO 52.9 1.7 6.9 (19.9%) 49.3 Poor Consumer Discretionary

T AT&T INC 211.7 1.6 4.5 12.9% 50.3 Poor Telecommunication Services

VRSN VERISIGN INC 9.7 1.1 31.3 26.3% 17.1 Good Information Technology

USG USG CORP 3.5 0.9 6.1 (32.8%) 48.5 Poor Industrials

BK BANK OF NEW YORK MELLON CORP 45.1 0.8 9.6 (9.7%) 33.3 Poor Financials

SU SUNCOR ENERGY INC 37.3 0.8 3.7 (18.1%) 30.8 Average Energy

V VISA INC 170.7 0.8 45.3 5.8% 1.0 Good Information Technology

COST COSTCO WHOLESALE CORP 71.0 0.7 11.6 1.9% 10.7 Above Average Consumer Staples

VZ VERIZON COMMUNICATIONS INC 188.1 0.7 5.9 8.4% 43.6 Poor Telecommunication Services

MTB M & T BANK CORP 21.5 0.7 8.4 (9.5%) Below Average Financials

AXTA AXALTA COATING SYSTEMS LTD 6.3 0.6 10.8 (8.1%) 41.3 Poor Materials

LMCA LIBERTY MEDIA CORP 12.9 0.6 7.9 (12.1%) 23.3 Average Consumer Discretionary

LBTYA LIBERTY GLOBAL PLC GLOBAL GP 34.9 0.5 12.4 (25.2%) 54.0 Average Consumer Discretionary

MA MASTERCARD INC 109.3 0.5 46.3 (3.7%) 3.9 Good Information Technology

KMI KINDER MORGAN INC 33.3 0.4 5.7 (54.7%) 34.0 Poor Energy

TMK TORCHMARK CORP 7.0 0.4 15.2 (3.2%) Financials

WBC WABCO HOLDINGS INC 5.9 0.3 13.2 (22.4%) 16.9 Below Average Industrials

GE GENERAL ELECTRIC CO 294.0 0.3 14.5 17.9% 21.6 Average Industrials

QSR RESTAURANT BRANDS INTL INC 17.5 0.3 13.8 (20.2%) 35.4 Poor Consumer Discretionary

LMCA LIBERTY MEDIA CORP 12.9 0.3 7.9 (12.1%) 23.3 Average Consumer Discretionary

LBTYA LIBERTY GLOBAL PLC GLOBAL GP 34.9 0.3 12.4 (25.2%) 54.0 Average Consumer Discretionary

Source: ¹Data taken from Berkshire Hathaway’s 2015 Q4 13-F; Includes only Equity Portfolio holdings with a position size greater than $.25 bn. Data sourced from HOLT Lens.



HOLT

Buffett’s Equity Portfolio in HOLT: The Berkshire equity portfolio in HOLT demonstrates high CFROI levels coupled with strong margins and consistent growth.

42

CFROI (%)


Sales, Margins and Asset Turns

Asset Growth (%)

Metrics above represent median values of constituents.



HOLT 43

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